👀 Creative accounting or Cooking the Books refer to 🚫unethical❌accounting practices that are used to manipulate financial statements 🔧💻 and misrepresent a company’s financial performance 🙅♂️🤥
➠➠➠✍️ EXAMPLES ARE:
🤐 Overstating Revenues: a company may record fictitious sales or inflate the amount of revenue they receive to make their financial performance look better than it actually is;
🗑️ Understating Expenses or Current Assets: for example, underestimating depreciation to artificially boost profits or understating the value of inventory (which may increase cost of goods sold) to decrease declaired profit on which to pay taxes;
🙈 Improper Capitalization: a company may improperly capitalize expenses, such as research and development costs, to make them turn into assets - in order to pump up either financial position and profitability.
➠➠➠🕵️♂️ WHAT COULD THEIR JOURNAL ENTRIES BE?
⚠️🏷️ Overstating Revenues:
✎Debit: Accounts Receivable
✎Credit: Sales Revenue
▸This journal entry would record a fictitious sale and puffing up the company’s revenue.
The accounts receivable balance would increase, reflecting the amount “owed” by the customer; sales revenue account would also increase, inflating the company’s reported revenue for the period.
🚮💳 Understating Expenses:
✎Debit: Prepaid Expenses
✎Credit: Cash
▸This journal entry would record an expense as a prepaid asset, rather than as an expense in the current period. By doing so, the company can artificially reduce its expenses and boost its profits. The prepaid expenses account (which is an asset) would increase, while the cash account would decrease.
🔍🔒 Improper Capitalization:
✎Debit: Research and Development Asset
✎Credit: Research and Development Expense
▸This journal entry would capitalize a research and development expense as an asset, rather than expensing it in the current period. By doing so, the company can artificially increase its reported assets and profitability. The research and development asset account would increase, while the research and development expense account (recorded before when purchases/payments incurred) would decrease.
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